American’s Current Strategy Has a Familiar Refrain: Follow Delta’s Lead

Second quarter earnings reports have come and gone, and there were two particularly interesting pieces of news coming from American. First, American announced it will begin allowing Basic Economy travelers to bring regular carry-ons onboard. And second, American isn’t growing much, but what growth it has will be focused on two places: Charlotte and Dallas/Ft Worth. It might not sound like it, but these two initiatives have one thing in common. They’re both an effort to catch up to Delta.

Basic Economy Gets Less Basic Thanks to Delta
Let’s start with the Basic Economy move. When American introduced Basic Economy, it, like United just before it, put a carry-on bag restriction on the fare. Anyone who bought Basic Economy (with a couple exceptions) could bring a small personal item to fit under the seat but nothing more. This wasn’t competitive with Delta, which rolled out Basic Economy long before American and United but never had a carry-on bag restriction.

American says Basic Economy is doing great, and in fact, 63 percent of American travelers who have the option to buy Basic Economy choose to buy up to regular coach. These fares were designed to make people pay more to get what used to be considered a standard benefit, and from that perspective, it’s working. The problem is, there are a lot of people who apparently aren’t buying American tickets in either cabin because, well, because Delta exists. CEO Doug Parker explained in the earnings call:

…for prices to the customers who are the buyers of this, there’s a big airline out there who doesn’t charge for the carry-on and there are now filters on things like your Google search that ask you if indeed you want to bring a carry-on or not, and if you say yes, all of a sudden the American flights don’t show up nearly as high as they did before because it adds $20 to our fare. Nothing wrong with that, that’s accurate. But when you get yourself in a position in this business where price-sensitive customers find themselves with lower fares on truly competitive airlines like that, we have to take that under consideration. And that’s what it is. We put this product out with a different model than others had done in the past, and we’ve gotten to the point where we think the right thing to do is to get in line with the competition.

True, Southwest also has no restriction on carry-ons for its lowest fares, but that’s not the “big airline” that Doug’s talking about. You can’t easily compare Southwest to American online since Southwest doesn’t participate in any of those sites. But Delta does, and when you go to Google Flights you see a lot of filters, including one for carry-on bags that gives Delta a big advantage.

When someone flips that switch, Delta will be able to show its Basic Economy fare including carry-ons while American can’t. And that is apparently hurting American enough to get it to change its policy.

This will have some negative financial impacts. The airline’s head of Revenue Management Don Casey thinks this policy will drop the percentage of people who buy-up to regular coach from 63 to about 50 percent. But American will now be able to attract those low-fare hunters who were increasingly choosing Delta. United doesn’t agree so far, and it says it isn’t changing, but as online travel shopping sites get better (ever so slowly) at showing product differences, the airlines will lose their ability to win on confusion. It sounds like thanks to Google Flights having that simple carry-on filter, American had to rethink this.

You could probably see pretty easily how this was Delta-influenced, but what about American’s growth plan? That’s a bit more subtle.

American Chases Atlanta
American talked about this a lot in its most recent earnings call, but I think Doug Parker said it best.

If you look at where our growth has been over the last year at American, it’s not been in our most profitable hubs. Indeed, we’re building up LAX, which is the right thing to do. Long term strategic, it was some growth in Philadelphia in response to some competitive incursions there to make sure that we were competitive. But not in places like Dallas and Charlotte, and not in places like our strongest hubs, which some of our other competitors did.

Apparently in the last year, American has focused on what it would call strategic growth. It may not be the most profitable place to put airplanes, but it’s still important for one reason or another. That’s done. Now American is going to focus on where it makes the most money, and that is in Dallas/Ft Worth and Charlotte.

This might sound obvious, and really, it is. American is getting 15 new gates at DFW and 7 in Charlotte so it has the room to start growing further in the places where those airplanes can make the most money. Go figure.

What does this have to do with Delta? Well, Delta’s already done that. Atlanta is the holy grail of hubs with an incredible amount of throughput, and American wants to create an Atlanta at DFW. Charlotte won’t get nearly as big, but it has room to get bigger and bigger in a very profitable way.

In short, American will continue to grow in its hubs so it can try to get an Atlanta-like position. Meanwhile, Delta has moved beyond its hubs to try to cultivate new frontiers. We’ve seen Delta start to build up Boston into a focus city. Raleigh/Durham is now one as well. And there’s talk of Austin being the next place Delta goes. So while American tries to get bigger in its hubs, Delta gets broader in strategic markets, chipping away at the loyalty people in those cities have to other airlines.

None of this is to say that American is doing the wrong thing. What American is doing makes sense. As usual, however, Delta is ahead in this race.

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Tim Dunn
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This question on American’s earnings call from JP Morgan analyst Jamie Baker couldn’t be more accurate of the way many see AAL right now. “Doug, and let me just push you a little bit tougher here, we all remember a time when United couldn’t punch its way out of a paper bag, when they were the perennial last place member of the big three. And what I’m being asked right now from investors is whether American has now simply stepped into the shoes that United once occupied. Maybe that is simply the construct of the industry going forward. It’s almost… Read more »

USBusinessTraveller
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USBusinessTraveller

I agree with Tim. This isn’t driven by a “copy Delta” strategy from a position of strength but more desperation/knee jerk reaction to their very poor financial performance. I just listened to the AAL earnings call and the difference between that and UAL’s was like night and day. Parker just bumbled along while Munoz and Kirby handled the questions very assuredly, which reflects the situation each airline is in. I’m sure Delta’s went fine. United beat American on operating margin by 2%, with a year on year margin swing to UA of 3% and to DL of 4%. It’s only… Read more »

A
Guest

ATL works so well for Delta because it’s a super efficient airport setup. CLT and DFW can’t compete in the same capacity just due the the architecture of their layout. I’m not sure who came up with the plan to convert ATL into the concourse layout it is today but that person was a genius and responsible for laying the foundation of the worlds busiest airport.

Kilroy
Guest

Agreed. As much as many people like to knock ATL, it’s a ~5 minute walk from almost anywhere post-security in the airport to the nearest tram stop, then a < 3 minute wait for the tram, a 2-10 minute tram ride, and a < 5 minute walk to the curb or the next gate. For an airport of its size, that's incredibly efficient, for both connecting and O&D pax. (For mid-size airports, I'd nominate TPA as being among the most efficient, as I've timed it at 12 minutes from wheels on the runway to curb before, and that for an… Read more »

Sam
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Sam

Atlanta had a couple mayors in the 70’s who were very forward thinking and aggressive about promoting air travel and infrastructure. Not sure they designed the layout themselves but it certainly wouldn’t have happened without them. Their names are pretty familiar now… William B Hartsfield and Maynard Jackson.

It also helped there was a former Governor of Georgia in the White House at the same time who was busy deregulating the airline industry. History can be fun sometimes ;)

Jake
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Jake

Not true. Where are AA’s 9 seats per row-configured 777s? And the comfy A350s for longhaul? Where is AA’s order for the customer-pleasing A220s with its wide cabin and seats? There may be Delta envy on the part of American, but no following of DL on the thing that matters most, and the financial results are proving people pay for, customer experience.

Tim Dunn
Member

Let’s not underestimate the impact of Kirby and other exec moves from American to United.

DesertGhost
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Parker has a history, for better or worse, of trying something different and making adjustments when it doesn’t work. He also has a history (even at America West) of retrenching when things get bad, and rebuilding as things get better. It seems to me that American and Delta are doing the same things network wise, but they’re doing them in reverse order. United is also building up its hubs, one of which, Chicago, competes head-to head with American. All of this adds competitive pressure to an industry that, according to many armchair CEOs, has consolidated its way to a point… Read more »

iahphx
Member

Yeah, there’s this cliche that American (and United) are always following DL’s lead. I think it’s more cliche than reality. The biggest financial blunder DL has made in the past 10 years was NOT following Doug Parker’s long-standing advice to eschew costly fuel hedges (you basically lose big money on expensive hedges 90% of the time). After this cost DL a couple BILLION, it decided to listen to Parker. Parker has never made billions following DL’s strategies. :) Parker might also have been correct that the best way to price Basic Economy is without a free carry-on — inducing more… Read more »

EC
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EC

United turned me off to their Basic Economy with one fatal flaw: the requirement to be at the airport to complete the check in process an hour before the flight. I was fine with last to board, no overhead access, no MQMs, etc. However, if I just have a backpack or an underseat bag, there is no reason to be at the airport that early, especially those with pre-check. Not even Spirit or Frontier have such a draconian policy.

Anthony
Member

And yet when it came to aircraft, Delta mostly opted to follow rather than lead,
e.g. not ordering 787s. Apparently the current management has a more flexible philosophy.

southbay flier
Guest

How does that make them a follower? They are the only US airline flying the A350, which from what I understand is a nice ride as well. So, what DL does is follow their own path and it has worked out extremely well for them.

JuliaZ
Member

Delta has lost the possibility of ever getting revenue from me now that they’ve announced that they will start putting peanuts on their airplanes. And as Southwest has gotten rid of them, and as their planes go through deep cleaning, they finally become an airline that I CAN consider (though I despise their boarding methods). I’ll stay loyal to Alaska thanks to being MVP Gold but when pressed for options, I’ll start considering American and maybe SW again. Sorry, Delta. I don’t care WHERE you fly or how often if you’re going to serve snacks to kill me.

Daniel M
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Daniel M

FYI – Delta has a “Peanut Option” after you book a flight with them. If you are this severely allergic, you can request your flight to be peanut free.

Jumbo
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Jumbo

Since I do not wish to be accused of tossing around the term, do you avoid all zoos? All carnivals…all baseball parks–plenty of peanuts in all of those places. Do all cruise ships that carry peanuts or TSA-inspect all passengers for nuts in carried luggage fail to meet your exacting standards? After all, most cruise ships will take longer to arrive at a hospital than the thirty to sixty minutes for most domestic/transatlantic/S American flights. This is without even touching on the risk compensation effect of people falsely or predictably carrying around their epipens or others antidotes of choice less… Read more »

Mr Peanut
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Mr Peanut

Aww poor you.

Anthony
Member

I suppose it’s no laughing matter when the issue is dangerous food allergies… but as the subject has come up, I recall thinking that SWA dropping peanuts would’ve made a great cartoon: the Planters’ Mr Peanut walking away from a SWA jet, saying, “I can’t believe it… I flew with them all those years, but now I’m denied boarding.”

Kilroy
Guest

Just wait until United drops peanuts. Then Mr. Peanut can be drawn getting dragged off a United flight kicking and screaming. (too soon?)

Scott
Guest
Scott

Do you actively avoid all places that may serve nuts at their place of business (fairs, farmers markets, restaurants, rodeos)etc? Do you not go into grocery stores where they have nuts, because it’s life threatening to you? What about picnics? Movie theaters that have nuts/dust? Sounds like you want everyone to cater to you. If it can kill you stay home with your medication. I’m allergic to bees/wasps & cats. Does that mean I can’t go to the lake, park, hiking etc. No, it means that I come prepared just in case. The world doesn’t revolve around you, nor I.

Tim Dunn
Member

Julia also doesn’t apparently realize that many businesses will not guarantee that they will not an allergy free environment for any specific substance because there are legal implications in saying that you will do so and not being able to deliver. No airline can require that passengers leave their own peanuts off of the plane just as airlines cannot guarantee that you will not be exposed to pet dander which I would bet is a health hazard to more people than peanut allergies. Your point is completely valid, Scott. Americans have come to expect that everyone should cater to their… Read more »